Debt Collection Laws & Regulations in the UK

One of the functions of the Financial Conduct Authority (FCA) is to protect consumers from unscrupulous debt collectors, promote ethical practices, provide clear and accurate information, treat debtors fairly, respectfully, and avoid aggressive or misleading tactics.  For example, collectors must not misrepresent their authority, purpose, or the consequences of not paying a debt. 

A consumer debt relates to personal obligations due to a mortgage, credit card, bank account, overdraft, loans, payday loans, or hire purchases.  Some examples can be secured or unsecured; a secured debt is when the borrower assigns an asset or assets as collateral against the loan.  Generally, these types of debts are regulated under the Consumer Credit Act 1974, which by law states that several formalities must be adhered to.  The law is clear: a debt collector who pursues any debt regulated under the Consumer Credit Act must be regulated by the FCA; not being regulated is a criminal offence, punishable by a fine and or imprisonment.

Correspondingly, any debt arising from these transactions is also regulated by the FCA, and the lender or intermediary who provides the loan/facility must be fully qualified and authorised by the FCA. 

It’s worth noting that business finance, loans approved in a limited company’s name, i.e., money loaned to a business without a personal guarantor (PG) or some purchases made by High Net Worth (HNW) individuals, are not generally regulated. 

Confusingly, according to the FCA, lenders that provide a *”borrower-lender-supplier agreement (that’s to say, it must finance the acquisition of specific goods or services), for a fixed amount”, repayment must not be *”no more than 12 instalments within no more than 12 months” a, need not be regulated.  In addition, to qualify, the agreement must not include charges or interest, and there can be no arrangement fee or admin fee, nor can it be a pawn agreement or an agreement to purchase land. 

(*source FCA) for more information, visit www.fca.org.uk/firms/authorisation/apply/exemptions-exclusions 

Accordingly, no regulatory body regulates business-to-business debt recovery, which means anyone can set themselves up as a debt collection agency.  However, experience and having the proper ethical approach matter.  Therefore, businesses should only entrust their debtors with agencies that have adopted an explicit, disciplined and legitimate recovery protocol that will not bring their firm into disrepute or leave them tarnished through unethical conduct, unwanted accusations or even litigation.

Debt collectors should behave professionally, have clear principles, and conduct themselves ethically when engaging with debtors.  Being unregulated doesn’t mean that they can do what they want.  For example, debt collectors can’t contact debtors at unreasonable times or places or use excessive language that can be construed as a physical threat.  If they do, they run the risk of being accused of harassment or demanding money with menace which are both serious criminal offences. 

Accordingly, just because a debtor doesn’t want to pay a debt or decides to ignore a debt collector hoping that they will go away, it doesn’t give them the grounds to accuse the debt collector of harassment.    That is why debt collectors need to demonstrate that they have a documented process at each point of contact with the debtor.  More importantly, if necessary, consideration should always be given by creditors to escalate the debt in the Courts.

The law is straightforward about interest and fees that can be applied to agreements regulated by the CCA.  Equally, interest and compensation for debts relating to business-to-business or commercial transactions associated with the supply of goods and services are permissible under the Late Payment of Commercial (Interest) Debts Act 1998 (Amended 2002).  Under the Act, businesses can charge interest, compensation, and pursuant to an amendment, the Late Payment of Commercial Debts Regulation 2013, their reasonable debt recovery costs can also be added.  To comply with the Act, there must be consideration (payment for goods or services), and the two businesses must have a legally binding agreement.  Transactions relating to land, money, shares, or employment contracts are omitted.  

In the absence of a business’s specific terms, the legislation is implied; therefore, companies are not legally obliged to forewarn the debtor of their existence or display these charges in their terms and conditions or on their invoice.  These charges take precedence 30 days after receipt of the invoice or providing the service if a business does not give late payment provisions.  Parties can agree to 60-day payment terms, and this may be extended if in writing, providing it is not “grossly unfair”.  The Late Payment Act provides business debtors with a clear and legal framework to compensate creditors for late payments; accordingly, the same can be an excellent deterrent to prevent late payments from occurring in the first place. 

Creditors owed money from non-business customers cannot invoke the Late Payment Act.  Therefore, their terms and conditions must be specific in this eventuality.  It’s worth noting that any late payment terms relating to business-to-business or non-business customers should be fair and not fall foul of the Unfair Contract Terms Act 1977 (UTC). 

Unless otherwise contractually agreed, businesses or individuals cannot add interest to non-business (consumer-related) debts.  Section 69 of the County Courts Act 1984 is clear; judgment interest (currently 8%) is only applicable when the court’s order has conferred judgment.  Accordingly, a creditor should not arbitrarily assume the right to add interest because of late payment.

The following fees are applicable pursuant to the Late Payment of Commercial (Interest) Debts Act 1998 (Amended 2002) and the Late Payment of Commercial Debts Regulation 2013.  They can be applied to each late invoice. 

Compensation

Compensation is a fixed sum, which is applied to each late invoice.

• £40 for invoices from £1 to £999.
• £70 for invoices from £1,000 to £9,999 and
• £100 for invoices from £10,000 upwards.

Interest 

A creditor can charge interest at 8% above the Bank of England base from when the invoice first became due, or if no due date is given, interest can be charged 30 days from when the customer is given the invoice, when the goods were delivered, or when the service was provided.  You cannot charge interest pursuant to the Act if there is a different interest rate in the contract or on the invoice for late payment.  The interest quoted in the agreement or on the invoice takes precedence.  Interest is applied at a daily rate up to the point of payment.

The legislation regarding the amount a business can claim for recovering a debt is quite ambiguous.  It states that costs should be “reasonable”.  Accordingly, it is worth noting that the amount should be proportionate to the size of the debt.  However, the costs can include a business’s time spent trying to recover the debt internally and the costs incurred using a Debt Collection Agency. 

Creditors or debt collection agencies can’t arbitrarily inflate the amount owed.  Any interest, charges, or fees must be stipulated in the original agreement, or if the matter relates to a business-to-business debt, fees/charges must be legally permissible pursuant to the Late Payment of Commercial (Interest) Debts Act 1998 and the Late Payment of Commercial Debts Regulation 2013.  Excessive charges or fees can be challenged in court. 

If a debtor disputes a debt, collectors must generally stop collection efforts until the dispute is resolved.  During this time, they can’t continue to demand payment.  The creditor should explore all avenues to try and settle the conflict, and this could consist of Mediation or ADR.  If that fails, the legal proceedings should only be considered a last option. 

The FCA stipulates that all businesses have special considerations for dealing with vulnerable consumers, such as those with mental health issues or financial hardships.  In such instances, although currently unregulated, it is advised that non-regulated debt collection agencies should adopt a similar approach where creditors are expected to be lenient and, when necessary, provide additional support to the debtors identified.

If a debtor fails to pay, a creditor can take legal action to recover the debt by issuing proceedings in the County Court.  Without a specific contract between the creditor and debtor relating to the period or term, by law, the debt must not be any more than six and twelve years old for mortgage shortfalls.  Any obligation older than these periods is “Statue-Barred” by the Limitation Act 1980; this doesn’t mean that the debt must be written off; the creditor can still attempt to recover the debt indefinitely; it simply means that the creditor cannot issue legal proceedings to collect the debt through the court.  Accordingly, depending on the type of debt, at the court’s discretion, the period can be extended.

When a judgment has been conferred in the creditor’s favour, the court will issue an Order for the debtor to pay the debt.  If the debtor still does not pay, and the debt is £600 or more, the creditor could choose to escalate the matter for enforcement in High Court. 

For business debts over £750, subject to a written demand for payment or court order, a creditor could issue a winding-up petition (see below) in the High Court.  For debts over £5,000 owed by an individual, post-judgment or not, the creditor could also serve a Statutory Demand for payment (see below), which is the first stage required to start bankruptcy proceedings for an individual. 

A Statutory Demand is not a court document; however, the court recognises it as an official demand for payment.  For a Statutory Demand to be valid, it must be completed and served in a prescribed format pursuant to the Insolvency Rules 1986.  There are three types of forms, debts payable immediately, debts payable pursuant to a court order and obligations payable sometime in the future (this is used if a creditor thinks a debtor will not be able to pay a debt in the future when they have to).  In all instances, the debtor has 21 days to pay the debt. 

A creditor can issue a Statutory Demand (debts payable immediately) for payment without a judgment.  However, the debt must not be disputed, i.e., there must not be any contention between the creditor or debtor regarding the payment of the debt.  If there is any dispute, then using this method is unsuitable.  Therefore, creditors should consider the risk involved if their debt claim is not watertight.  Accordingly, once the debtor has received a demand, they could apply to the court within 18 days from the service date to set aside the demand (see Disputed Debts, above).  The debtor must provide the court with a particularised witness statement and any evidence proving the dispute.  If the court believes there are “reasonable grounds” for dispute, it might set the demand aside.  The creditor could then be liable to pay the debtor’s legal costs incurred.

In the case of a limited company, upon the expiry of a demand, a creditor could issue a Winding up Petition pursuant to the Insolvency Act 1986. 

Section 123 of the Act states that “a company is deemed unable to pay its debts” if a creditor has served a demand for payment on the company at its registered address and three weeks have elapsed since the date of service, and after that, the company has neglected to pay the sum owed “or to secure or compound for it to the reasonable satisfaction of the creditor,” or “if it is proven to the satisfaction of the court that the company is unable to pay its debts as they fall due” then the company may be wound up. 

Also, “if it is proved to the satisfaction of the court that the value of a company’s assets is less than its liabilities taking into account its contingent and prospective liabilities,” it may be wound up in these circumstances.

If the goal is to recover a debt, creditors should consider the implications of issuing a winding-up petition to wind up a company.  It’s important to realise that this can be fatal once a petition has been advertised.  The debtor’s bank account will be frozen, and all credit facilities will be withdrawn, making it impossible to trade.  Accordingly, this may have a domino effect and alert other creditors trying to procure payment.  Once the petition has been heard and the order has been made to wind the company up, the Official Receiver is appointed to dispose of its assets to repay its creditors.  Once the assets are realised, and all the creditors have been identified, there is no guarantee that the company will have sufficient funds to cover the debt.

It’s important to note that this is a simplified overview of UK debt collection laws and regulations.  Both creditors and debtors should seek legal advice if they’re unsure about their rights and responsibilities.

At First Capitol, we pride ourselves on our strict adherence to all laws and regulations governing our industry.  We believe in fair and ethical debt collection, always treating our clients and their debtors with the utmost respect and professionalism.